Changes Needed at Avon Are More Than Cosmetic

Sherilyn McCoy, Avon Products’ new CEO, faces a daunting list of challenges: a three-year internal investigation into charges of government bribery in China; an SEC investigation into alleged leaks to analysts; possible takeover offers from two different suitors, and a performance profile that includes lagging sales and a stock that lost nearly half its value in 2011.

While McCoy will no doubt call on her three decades of experience at Johnson & Johnson — most recently as worldwide chair of pharmaceuticals — many observers are wary about her ability to re-establish the 126-year-old company as an innovative customer-centric cosmetics organization. But they all agree that to succeed, she needs to defuse the current controversies and return to Avon’s door-to-door direct sales roots.

“She is clearly qualified, but she has no direct sales experience,” says Wharton management professor Lawrence Hrebiniak, adding that this lack of familiarity with Avon’s business model means McCoy faces an unusually steep learning curve. Her biggest challenge, he notes, is to refocus a brand that former CEO Andrea Jung led astray over the past few years in her attempts to recreate Avon as a retail powerhouse that could compete with the likes of L’Oreal. Yet the company never had the manpower or resources to make it to that level, Hrebiniak states, even as it was turning away from its tried and true direct sales model. “Jung really created strategic uncertainty for the company. It’s still in the position of deciding what it wants to be when it grows up.”

The Original Social Network

Wharton marketing professor Peter Fader suggests that McCoy needs to once again focus Avon on its customer base. “There are signs that Avon is going the other way — focusing on brand and other wishy-washy things rather than leveraging its rich understanding of customers,” Fader says. “Avon has a gift,” he adds, which it does not fully appreciate.

With the advent of social media and other technologies, many companies are now trying to become more customer-centric, which includes efforts not just to better understand customers, but also to identify the most valuable ones — a strategy which Avon has followed through face-to-face contact for over a century. “There is actually now a celebration of business models — like Avon’s — that are unabashedly direct,” says Fader, author of a recent book titled, Customer Centricity.

Companies are also using social media to promote, and benefit from, customers’ word-of-mouth marketing. Again, Avon has practiced this approach, in its own way, almost from the beginning by turning frequent customers into full-fledged sales representatives, according to Wharton marketing professor Leonard Lodish. Avon’s website even gives a nod to its old-school social networking, calling its direct sales model “the original social network.” Its history page features a section called “Empowerment and Social Networking … Long Before Facebook.”

“People selling cosmetics to friends and people they know is right in the center of modern social media,” Lodish says. “It’s an interesting method of distribution,” one that has traditionally relied on “being able to leverage personal relationships.”

Yet according to an article this week in The Wall Street Journal, Avon still has a ways to go when it comes to harnessing social media as a sales tool. More and more consumers buy cosmetics online, a trend that has already been capitalized on by Avon rivals like Sephora.com, Beauty.com, Drugstore.com and Mary Kay, the article notes. While Avon has developed e-catalogs along with iPhone and Android apps for some of its brands, “sales representatives say [the company] isn’t doing enough to help them win customers through new tools like social media, smart phones and tablets.”

Since its launch in 1886, Avon has focused mainly on door-to-door direct sales. In the last few decades, its representatives have expanded to workplace and online sales, and a handful of representatives have even opened their own Avon retail stores. The company also sells directly online, but none of its products are distributed through traditional retail outlets. At the end of 2011, the company reported $11 billion in sales. Only about 20% of Avon’s revenue is from the United States, with the rest coming from the 99 other countries in which it operates.

Bribery and Beyond

While Avon offers McCoy a rich legacy of social networking, it also saddles her with a four-year stretch of multiple controversies, including bribery allegations. Former CEO Jung took over the helm of Avon in 1999, making her the longest serving female CEO of a Fortune 500 company. She is known for promoting Avon’s female empowerment and branding it the “The Company for Women.”

However, in 2008, under Jung’s watch, Avon executives were charged with bribing officials in China, where two years earlier it had become the first company to obtain a direct selling license. The investigation has since expanded into other emerging markets, including Brazil, Mexico, Argentina, India and Japan, and last year four executives stepped down as a result of the findings. In 2011, the SEC began its own investigation into bribery allegations and possible violations of the Foreign Corrupt Practices Act. The SEC also launched a separate probe into charges that Avon executives leaked information to analysts. Last year, Avon lost ground in Brazil due to a poorly installed computer system that frustrated sales representatives.

With the expanding investigations last year, along with a decline in sales, Avon’s stock price dropped 45%. In the fourth quarter of 2011, Avon’s worldwide revenue dropped 4%, with only Mexico registering an increase. Avon’s stock is now trading around $22, up about 25% from the beginning of the year, but below the $31 per share price this time last year. In August 2008, it was trading at $44 a share. The Journal article, citing an analysis by Sanford C. Bernstein, reports that operating profit per sales representative in the U.S. has plunged 75% over the past decade.

In the last month, Avon has also been the target of two unsolicited offers. In late March, Avon rejected a $10 billion ($23.25 per share) takeover bid from Coty, a privately held beauty products manufacturer. And in the last few weeks, rumors have circulated that Richmont Holdings, owned by John Rochon, the former CEO of rival Mary Kay, is looking to make an unsolicited offer to buy Avon.

While McCoy tries to resolve all these problems, many of them cropping up during Jung’s watch, Jung herself will remain as “executive chairman” of the board. She plans to stay on in this role for two years during which “she will work closely with the new CEO in support of the company’s overall strategic direction and brand positioning,” according to a company press release. When the former CEO stays on in a lead role at the company, it rarely works well for the new executive, says Lodish. “It’s an unusual situation, and I think it’s really going to limit the ability of the new CEO.”

The New Avon Lady

Another challenge McCoy faces is how to make the “Avon Lady” image more appealing. Indeed, record numbers of sale representatives are leaving the company and few new ones are joining. In the fourth quarter of 2011 alone, Avon’s sales force dropped 3%, with sharp declines in North America and Russia.

Hrebiniak suggests that McCoy needs to “shake up the culture” and redefine what it means to sell Avon products, especially if she wants to attract younger women to the sales force. “She needs to revitalize it with new incentives and increased pay,” he says. “She’s going to have to play up the brand and [create] a lot of excitement.”

As the new CEO, McCoy must also focus more on recruiting sales representatives in emerging markets, where many women still have few employment opportunities outside the home, according to Monica McGrath, a Wharton adjunct professor of management.

Additionally, McGrath says, McCoy should tap into the emotional attachment a significant number of women still have for Avon, while making the Avon connection attractive to a new generation. “Many people have a very warm and nostalgic feeling about the brand. For my mother’s generation, it was the only way a woman could be a working mother,” she says. “[McCoy] needs to figure out how to … leverage those feelings.”